Many people see real estate as “passive income,” similar to the stock market. But what if there was a business to be had here?
Well, according to many people in the industry, there is. A lot of developers are builders, meaning that they understand how the basic creation of properties works, and how to construct them at scale.
So, why might becoming a developer and setting up a business be the superior approach?
Higher Value Creation
One reason is the higher profit margins. Most real estate investors get between 6% and 9% return on their assets per year, including appreciation and rental income. That’s roughly the same as a low-performing stock market.
However, developers can make much more than this in a shorter space of time. Many can generate massive profits by using inexpensive materials and labor while selling for the going price in the prevailing market.
For example, suppose a property costs $100,000 to build in land, labour and materials, but will sell for $250,000. That’s a $150,000 profit and an enormous margin.
Control Over Project Outcomes
Another reason becoming a real estate developer rather than investor might be more profitable is that you have more control over outcomes. You aren’t relying on market appreciation (which is what happens when you become an investor). Instead, you’re developing systems that generate value (such as new dwellings for people to live).
You can also build what the market wants. That’s why so many modern cities have studio apartment high-rises going up — that’s what the majority of people want.
Most developers go to architectural services to get this work done. They ask professionals to draw up low-cost, effective plans and run with them.
Access To Debt For Higher Returns
As a developer, you can still use debt for higher returns because of the underlying value of what you’re doing. Lenders are often willing to lend in tranches because at the end of it, they know that they will still have collateral.
For example, you could put down a deposit of $100,000 and get a loan of $400,000 for a building project. Then, you could build four properties selling for $300,000 each, for a total of $1.2 million. After paying back the loans, you would then have around $750,000 left as profit.
Multiple Revenue Streams
Finally, developers often profit from sales, leasing, and property management, diversifying their income streams. The idea here is to create a product ecosystem around the core service to “value add.”
For example, suppose a developer puts up an apartment block and enables investors to buy units to rent out to tenants. Those landlords often want someone to manage their properties, which is where the developer can step in with its valued-added services.
Leasing can also work. Here, the developer rents the properties to tenants for a few years and then gets them to pay a lump sum if they want to buy outright. If they can’t, they start a new lease or a new tenant moves in.